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Edited Transcript of RLH earnings conference call or presentation 27-Feb-20 2:00pm GMT

Q4 2019 Red Lion Hotels Corp Earnings Call

Spokane Mar 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Red Lion Hotels Corp earnings conference call or presentation Thursday, February 27, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John J. Russell

Red Lion Hotels Corporation - Interim President & CEO

* Julie A. Shiflett

Red Lion Hotels Corporation - Executive VP, CFO & Treasurer

* Nathan M. Troup

Red Lion Hotels Corporation - Senior VP & CAO

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Conference Call Participants

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* Alex Joseph Fuhrman

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Brian H. Dobson

Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs

* Eric Christian Wold

B. Riley FBR, Inc., Research Division - Senior Equity Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the RLHC Fourth Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Nate Troup, Chief Accounting Officer. Please go ahead.

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Nathan M. Troup, Red Lion Hotels Corporation - Senior VP & CAO [2]

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Thank you. Welcome to RLH Corporation's fourth quarter and year-end earnings call. With us today are John Russell, Interim CEO; and Julie Shiflett, EVP and Chief Financial Officer.

Before we get started, I want to remind you that the company's remarks today contain forward-looking information that is subject to a number of risk factors that may cause actual results to differ materially from those expressed or implied. For a discussion of important risk factors, please see our Form 10-K to be filed with the SEC later today. Our Form 10-K and other filings are available on our website, rlhco.com in the Investor Relations section or through the SEC website at sec.gov. These forward-looking statements speak as of today, and we undertake no obligation to publicly update them to reflect subsequent events or circumstances.

The company will also be referring to a number of non-GAAP measures. The reconciliation of these measures to their comparable GAAP measures is provided in the tables of our press release. That release is also available on the Investor Relations section of our website.

I will now turn the call over to John Russell, Interim Chief Executive Officer.

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John J. Russell, Red Lion Hotels Corporation - Interim President & CEO [3]

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Good morning all. This is John Russell, Interim CEO of RLH Corporation. Thank you for joining us today to review our results for 2019. I joined RLH Corporation in early December to lead and support the management team in the implementation of key tactics to stabilize and energize the core franchise business. In my short time at RLH Corporation, I've been extremely impressed with the vibrant spirit of this company and of its franchisees. While 2019 was a challenging year, we are dedicated to RLH Corporation being a thriving franchise and branding enterprise.

With our strong brands and engaged owners, we believe through our focus and hard work on 3 key priorities, we can return RLH Corporation to stability and eventual growth. These key priorities include accelerating new franchise sales and franchise growth, delivering superior value and service to our franchisees to improve franchise retention and aligning the cost structure of our business to RLH Corporation's current size, revenue and profitability requirements. In short, RLH Corporation is going back to basics. From the perspective of our owners, this means evaluating and implementing common sense brand standards that have a return on investment for owners, improving marketing spend to increase brand contribution, executing targeted campaigns with input from the owner community and providing refreshed focus on both owner and guest satisfaction. These initiatives were created from feedback we solicited directly from our owners. In order to improve retention and attract additional franchisees, we need to have a compelling proposition focused on improving owners' return on investment.

The entire management team is focused on improving franchise relations, retention and growth. To support these initiatives, we have launched campaign R.O.A. R., which stands for: R, recruit new franchisees and sell to existing franchisees; O, onboard and open as quickly as possible; A, add value with operations, training, purchasing, revenue management and marketing programs; R, retain franchisees for positive growth. R.O.A. R. is our mission. Making our owner successful and profitable can enhance our ability to retain our current owners and attract new ones.

We have also realigned our franchise development and operation structure to achieve the dual goal of improving owner satisfaction, to reduce terminations and to increase our development by increasing our in-market presence in gateway markets, refining our go-to-market strategy and enhancing our approach to onboarding and training.

As I mentioned earlier, beyond the focus of our owners, we are committed to reducing and rightsizing our support structure. Some initiatives on this front include consolidating office space and offshoring our call center provider, reducing our administrative workforce and renegotiating outside service contracts for the current size of the organization. In the near term, these initiatives will have costs associated with implementation. However, once completed, we anticipate operating under a reduced cost structure that is better aligned with the size and scope of our business.

While these changes are expected to have a positive impact once implemented, they will take time to complete. For example, consolidating our offices involves subletting our surplus space. Offshoring our call center requires that we run our new call center in parallel with our current one until we are satisfied that a seamless switch without disruption to our owners can be completed. Having to run 2 centers in tandem will temporarily increase cost incurred for this service offering, and changes to the composition of our workforce carries severance costs. We anticipate incurring incremental costs in 2020 as we implement these changes with the expectation of enjoying the full benefit in 2021 and beyond.

As part of our going back to basics and concentrating our efforts on our core franchise business, we've made a tactical decision to pause further investment in Canvas Integrated Systems. When RLabs was launched and Canvas was debuted, RLH Corporation entered into agreements for 7 hotels with a goal of 10 by the end of the year. We ended 2019 with 5 hotels in the system and have entered into 1 additional agreement in 2020, which is below our initial expectations. We will continue to support the hotels that have elected to subscribe to Canvas and to onboard other hotels that may have an interest in this product. While we believe Canvas is a viable and compelling service offering, as part of our back to basics and focus on growing our franchise business, we will not be investing incremental resources to aggressively grow the service at this time.

Turning to asset sales. We successfully completed the dispositions of our Atlanta and Salt Lake City hotels in the fourth quarter and Washington DC in early February. We continue to work on closing the sale of Anaheim by the end of the first quarter. We are also committed to completing the sales of our remaining hotels with Olympia and Baltimore now in the marketing process.

Before I discuss contract signings, it is important to provide you with some relevant information about franchise disclosure documents, or FDDs. Regulations require a franchisor to pause entering into a new franchise agreements in the event of a change in related leadership. Contract signings can resume once new FDDs are filed and approved by regulatory agencies. For Red Lion, this meant that we're out of the market for most of November related to the change in the CEO and, again, in mid-December, related to my hiring as the interim CEO.

With that additional color, we signed 26 new franchise agreements in the fourth quarter, bringing our total for the year to 169, slightly below our guidance range of 175 to 210. And we believe the primary cause of the shortfall was due to being out of the market for nearly 2 months. Offsetting these signings were 98 terminations in the quarter and 274 for the year. Julie will provide additional detail.

With respect to 2020, it's important to recognize that we may experience another pause in contract signings as the Board completes its process of naming a permanent CEO. When the CEO is named, we may once again be out of the market for a short time until our FDDs are updated, refiled and approved. While there were numerous internal organizational and operational changes at RLH Corporation in 2019, we want to provide some perspective on our franchise system performance by putting it into context with the rest of the industry.

In the third quarter, we discussed how the broad deceleration in the travel industry was having a negative impact on our hotels. That pressure continued in the fourth quarter. In the fourth quarter, our midscale hotels achieved a RevPAR index of negative 1.2% compared to STR's national RevPAR index results of negative 0.4%. In our economy hotels, RevPAR index was flat compared to STR's national index of 0.8% for economy hotels. Our midscale franchise hotels are primarily in secondary and tertiary markets that typically experience higher impacts from downturn market trends.

For the year, our midscale hotels achieved a RevPAR index of a negative 2.6% as compared to a negative 1.1% for the industry as reported by STR. Our economy hotels achieved a 0.2% RevPAR index for the year, in line with STR economy reports. Also of note, our improving customer satisfaction scores. For the year, we registered a 300 basis point improvement since 2018 to 73%. We view both of these, RevPAR index and customer satisfaction scores, as opportunities for improvement as we focus on our priority of delivering superior value and service to our franchisees.

Despite our internal challenges, we take confidence in our brands that our franchise system is performing similarly to trends being observed nationwide, especially when you measure our performance to the industry overall for 2019.

With that said, we're committed to improving RLH Corporation path forward and are taking action to position RLH Corporation for a more productive year ahead. We strongly believe the initiatives we have underway will have a positive impact over time. I'd like to thank the RLH Corporation team for welcoming me and for working so diligently to get RLH Corporation back to the basics.

With that, I turn the call over to Julie Shiflett to discuss our financial results.

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Julie A. Shiflett, Red Lion Hotels Corporation - Executive VP, CFO & Treasurer [4]

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Thanks, John. RLH Corporation reported a net loss for the fourth quarter of 2019 of $8.1 million or $0.32 per share as compared to a net loss of $7.4 million or $0.30 per share in the prior year period. The year-over-year change was primarily related to the loss of income from the company-operated hotels that were sold during the prior year and a decrease in royalty revenue, partially offset by higher other franchise revenue and a decrease in selling, general and administrative costs.

In 2019, the company recorded an $8.7 million impairment charge on intangible assets related to its Americas Best Value Inn and Knights Inn brands, which was partially offset by a $7.1 million gain, primarily from the sale of 2 company-owned hotels.

In the fourth quarter, adjusted EBITDA came in at $1 million as compared to $2.3 million in the same period last year. The decline was primarily driven by $1.4 million in lower contribution from owned hotels due to asset sales and performance. For the year, adjusted EBITDA was $11.6 million as compared to $15.8 million in 2018. Our core franchise adjusted EBITDA in the fourth quarter increased to $1.6 million as compared to $1.4 million last year, which includes the add-back of brand impairment charges and employee separation costs. The year-over-year improvement was driven by higher marketing and reservations revenue.

For the full year 2019, core franchise adjusted EBITDA rose to $4.2 million from $600,000 in 2018, primarily driven by a full 12 months of royalty revenue from the Knights Inn acquisition as compared to 7.5 months in 2018. The incremental contribution from January to mid-May 2019, for comparative purposes, was approximately $1.8 million in royalty revenue from Knights Inn. Also contributing was an increase in revenues from reservation fees and reputation management programs.

As John discussed earlier, we signed 26 new contracts in the fourth quarter, comprised of 4 midscale and 22 economy hotels. Of the 26 new contracts signed in the quarter, 3 were for new locations, 2 were for our midscale brands with 360 rooms and 1 was for our economy brands with 40 rooms. This was offset by 98 terminations comprised of 6 midscale hotels with approximately 1,300 rooms and 92 economy hotels with approximately 5,300 rooms. The 98 terminations represent approximately 6,600 rooms. The economy terminations were predominantly comprised of 33 Knights Inn hotels and 52 ABVI hotels. For the full year, we signed 169 new hotel contracts, comprised of 27 midscale hotels and 142 economy hotels. Of this, 43 were for new locations, comprised of 16 midscale hotels with 1,700 rooms and 27 economy hotels with 1,500 rooms. These contracts will have phased conversions or openings over the next 24 months.

The contribution of new locations signed and opened in 2019 was $100,000. These 43 new locations will contribute an estimated royalty revenue of approximately $1.3 million for their first 12 months after opening and after application of incentives and fee deferments. In 2018, we signed 51 new locations, excluding the package of 10 Inner Circle hotels. The 2018 new locations contributed royalty revenue of $150,000 for 2018 and $500,000 for 2019 and a pro forma contribution of $650,000 for 2020. In total, the Inner Circle hotels contributed $900,000 and $1.2 million in royalty revenue in 2018 and 2019, respectively, and we expect minimal contribution from these hotels in 2020.

Terminations for the year totaled 274 hotels comprised of 23 midscale hotels with 3,200 rooms and 251 economy hotels with 15,400 rooms. Of the 251 economy hotel terminations, 82 were in our Knights Inn brand and 141 were for our ABVI brand. The elevated level of terminations in the quarter and the year resulted from a mix of factors, including change of hotel ownership, individual hotel financial challenges and monetary defaults. The 2019 terminated agreements had royalty revenue of $1.9 million in the 2019 year and on a pro forma basis would have contributed royalty revenue of $3.6 million for 2020. We are highly focused on bringing our termination rate more in line with the industry standards. With regard to renewals or new contracts executed at the time of expiration or contract windows, we achieved an 86% retention rate in 2019.

For the quarter, selling, general and administrative costs were $7 million as compared to $7.6 million for the fourth quarter of 2018. The decrease was primarily driven by a $1.6 million decrease in stock compensation and a $1.2 million decrease in labor costs, both related to administrative headcount reductions or terminations, partially offset by a $1.2 million increase in bad debt and a $1.1 million of employee separation costs.

Our marketing and reimbursable expense in the quarter decreased to $7.2 million from $7.7 million and would have been flat, except for $400,000 of employee separation costs in the prior year. In the quarter, we were pleased to close the sales of our Atlanta and Salt Lake City hotels as well as our DC hotel subsequent to year-end. After repayment of closing costs, property level debt and distributions to our joint venture partner, RLH Corporation netted almost $17 million, in line with our expectations. Proceeds were used to retire the corporate term debt of $4.2 million. These hotels contributed a negative $400,000 in EBITDA in the fourth quarter and $2.2 million of EBITDA for all of 2019.

We anticipate the Anaheim hotel sale will close in the first quarter of 2020. The delay in closing the sale is related to various diligence items that are progressing towards completion. We've also begun the marketing process for our Olympia and Baltimore hotels. We continue to anticipate the cumulative net proceeds in the range of $32 million to $36 million from the combined 2019 and 2020 asset sales. Red Lion Corporation will be using the cash proceeds from these assets to retire existing hotel and corporate debt, support the franchise system initiatives and other options in the best interest of shareholder value.

RLH Corporation finished the year with cash and restricted cash of almost $32 million, including $4 million held by the joint ventures, and debt of $32.6 million comprised of a $10 million line of credit and $22.6 million of hotel mortgages. Subsequent to year-end, $17 million of the hotel mortgage debt was retired with the sale of our DC hotel in February. As of December 31, 2019, the company had net debt to trailing 12 months adjusted EBITDA ratio of 0.1x. Adjusted free cash flow for the 12 months ended December 31, 2019, was approximately $14 million as compared to adjusted free cash flow of a negative $15.1 million for the 12 months ended December 31, 2018.

Given the programs we're implementing with respect to our franchise sales and development initiatives, we anticipate new location contract signings of 60 to 80 in 2020. That is a goal of doubling the prior year new locations signed. Please note, this refers to new locations and not total contract signings as we've discussed in the past.

Given our limited visibility with respect to the timing and impact of cost reduction initiatives and the many moving parts, we believe it prudent at this time to forego providing any financial guidance for 2020 at this time.

That concludes our prepared remarks, and we'll now open the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Alec -- Eric Wold of B. Riley FBR.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [2]

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So just a couple of questions. I know you're not giving formal guidance for 2020. I'm just trying to get a sense of kind of maybe a broad outlook on a couple of things. I guess, one, maybe the kind of the health of the franchise base. You gave guidance for expected new location franchise agreements to be signed in this year, doubling of last year. Is there a sense of maybe give a range of what you think the number of franchise locations in there right now that would be at risk of being terminated maybe over the next 12 months and you're going to look at the health of them?

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Julie A. Shiflett, Red Lion Hotels Corporation - Executive VP, CFO & Treasurer [3]

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Yes. Thanks, Eric, for the question and thanks for being on the call this morning. We expect that the termination rate is going to remain above industry standards for the next couple of quarters and then leveling out back to close to industry standards in the last half of the year, as we continue to work through a couple of the items that I discussed in the prepared remarks, such as some monetary defaults or health of those franchise hotels. But with all of the efforts that John and the new franchise development team have been generating related to improving our owner satisfaction, reducing some of the brand standards that do not create return on investment for our owners, reallocating our marketing funds to improving contribution, all of those things have received very positive results and feedback from our owners. John and the team are having monthly meetings with owners and getting very positive feedback. So we expect that as we move forward in the year, that will have a positive impact on our termination trend.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [4]

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Okay. And then on SG&A, I understand that you're in the process of rightsizing it to more appropriate levels. You outlined a number of that in the comments initially. I know it'll take some time, but do you -- obviously, you got to have kind of an internal target or kind of goal of where you think is appropriate. Can you give us a sense of where that is versus kind of the high $20 million to $30 million that you've kind of been running at? Where is kind of more realistic level that you'd be shooting to get to over the next, call it, couple of years?

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Julie A. Shiflett, Red Lion Hotels Corporation - Executive VP, CFO & Treasurer [5]

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I think one of the pieces that we've expanded disclosure on to assist with that is our EBITDA and adjusted EBITDA reconciliations that are in the last 2 tables of the press release. And those both call out some of the onetime charges that are in our SG&A, like the employee separation and transition costs of $1.1 million, our stock-based compensation of almost $2 million. So taking out those items and expand our fixed costs related to being a publicly held company and then the items that we're talking about, office consolidation and all those pieces, we do expect to see SG&A reducing in a manner consistent with the size of the organization. We don't have a public target that we're disclosing at this time as we're continuing to work on that process and identify new opportunities.

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Operator [6]

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Our next question comes from Alex Fuhrman of Craig-Hallum.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [7]

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One question. I wanted to ask about the target of 60 to 80 new franchise locations. Obviously, that would be quite an increase over what you saw in 2019. Wondering if you can give us a little bit more color on that. Where the confidence is coming from that you'll be able to get such a big increase in that new franchise location number? Have you seen any new franchise agreements signed year-to-date? And then just thinking about the mix by brand, is it fair to assume that those new locations will be primarily Americas Best Value Inn? Or have you seen or expecting some of your other brands to participate significantly in that growth as well?

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John J. Russell, Red Lion Hotels Corporation - Interim President & CEO [8]

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Yes. Alex, this is John Russell. We have new leadership in place for our development team. They're very focused around the country now, and they're keen on conversion opportunities from other brands, what we call up-and-outs. In other words, some Holiday Inns -- older Holidays Inns or modest Sheratons are leaving the systems. So we're targeted very singularly on that. We're also leveraging opportunities to generate -- to go into gateway cities like L.A., Chicago, New York City because they are great billboards for our brands. So we sell off of those for future sales. We have new incentives, including referral incentives that we launched in Q1, encouraging existing owners and others to send us leads that we can convert to franchise sales. So all in all -- and this has mostly been launched in the first quarter, and we do anticipate we've seen some definite movement at positive. So we think that we've got some good brands that have strength for the future.

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Julie A. Shiflett, Red Lion Hotels Corporation - Executive VP, CFO & Treasurer [9]

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And from a -- Alex, the mix of what we expect in the contract side is similar to the mix that we've been seeing last year in terms of new locations. And that's one of the things is that our guidance this year is just new locations, not overall contract signings. And personally, the enthusiasm that I see in our lodging development team with the new leadership as well as the feedback that we're receiving from our current owners, and with that feedback, as John mentioned, we've launched the Refer and Receive program to be able to get also some referrals in for new contracts. I'm very excited and encouraged about the progress and very confident in the goal that we have of 60 to 80 hotels.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [10]

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Okay. That's helpful. And then just thinking about the listing for market, the properties in Baltimore and Olympia. Is that, in any way, price dependent? Or is the goal to get that done quickly? I'm just curious how long we should expect that process to take if you're looking to do that quickly or if you're really just kind of being opportunistic and waiting for the right price?

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Julie A. Shiflett, Red Lion Hotels Corporation - Executive VP, CFO & Treasurer [11]

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That's a great question. We believe we can get both of those under contract and sold by the end of this year. The -- as we've discussed in the past, the market in Baltimore is -- will be a significant factor in the timing of that. And the Olympia hotel is a size and a location that is really going to be looking for that specific buyer. So finding that buyer, it's not opportunistic or price dependent in terms of -- we have -- we're looking for a really high price. It's really the 2 factors that are going to impact us are the markets and the sizes of those hotels and where they are. But initially, in our process, we're seeing interest.

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Operator [12]

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Our next question comes from Brian Dobson of Nomura Instinet.

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Brian H. Dobson, Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs [13]

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I joined the call a little bit late, so I apologize if you've already touched upon any of these questions. But I thought your commentary on up-and-out was particularly interesting. And of the new contract signings that you've made, I guess what percentage of those have come from existing brands versus the pool of independent hotels?

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Julie A. Shiflett, Red Lion Hotels Corporation - Executive VP, CFO & Treasurer [14]

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That's a great question, Brian. And I don't have that information in front of me. So I'll look into that, and we'll have a follow-up on that.

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Brian H. Dobson, Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs [15]

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Okay, great. And then I guess let's flip over to terminations for a moment. Of the terminations in your system in the fourth quarter, how has that impacted your broader portfolio RevPAR index? In other words, are these generally lower-performing properties that are leaving your system? Or are they roughly in line with the average of the firm?

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Julie A. Shiflett, Red Lion Hotels Corporation - Executive VP, CFO & Treasurer [16]

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That's a great question also. The RevPAR that we discussed in the prepared remarks and is in the earnings release is same-store. So the hotels that have terminated and left are not included in that. One of the indicators that you can see of the quality of those hotels is the 300 basis point improvement that John talked about in our customer satisfaction. So that has come from 2 main pieces: one, hotels that are -- have a lower guest satisfaction, lower quality scores, lower quality hotels leaving our system; and two, the reputation management program that we put in place in the spring of 2019. So that's the indication, I think, of where those hotels are going. Also, John and I both talked about in our prepared remarks that hotels that actually had windows, that their contract had a window for renewal or they reached the end of the contract, 89% of those were retained by the company. 89% of those renewed or signed new contracts with the company. So the majority of those hotels that are leaving our system are from change of owner or are leaving outside of a contract window, and a lot of that would have to do with pressure in terms of reputation management, monetary default, those pieces.

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Brian H. Dobson, Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs [17]

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Okay. That's very helpful. And then I understand that you're not going to be providing guidance for this year, but can you give us some color on terminations so far this year? Have you seen an acceleration, deceleration from the fourth quarter pace? Or is that roughly in line, call it, year-to-date with what you saw in the fourth quarter and third quarter?

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Julie A. Shiflett, Red Lion Hotels Corporation - Executive VP, CFO & Treasurer [18]

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It's -- all of the initiatives that John talked about, our mission of R.O.A. R. and increasing our outreach to the current owner base, including also reducing some of the non-ROI-returning brand standards and others, has seen a positive impact in owner satisfaction and interactions. And with that, we expect to see the termination rates declining as we move into the latter half of the year. And I'm looking forward to reporting on Q1 right after -- when we have the Q1 results.

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Brian H. Dobson, Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs [19]

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Yes, sure, which are coming right up. And then in terms of the hotels that are leaving the system, are they predominantly going to a national brand? Or are they predominantly becoming independent assets or smaller chain assets? I guess who is -- who are these assets turning to?

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John J. Russell, Red Lion Hotels Corporation - Interim President & CEO [20]

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Yes. Mostly, they're turning to independents because in their mind, a lot of the -- it's a less expensive alternative. Don't know if that's the truth because the value that we provide as a brand is not there, but most of them are going to independents.

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Operator [21]

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There are no further questions at this time. I would like to turn the floor back over to John Russell for closing remarks.

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John J. Russell, Red Lion Hotels Corporation - Interim President & CEO [22]

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Yes, so I want to thank you for joining us and your questions. We look forward to speaking with you again in the near future and our mission is R.O.A. R. Thank you.

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Operator [23]

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This concludes today's conference call. A replay of the call will be made available for a period of 2 weeks following the conference call. To hear a replay of the call, dial (877) 660-6853 or (201) 612-7415, conference ID 13698294. You may disconnect your lines at this time. Thank you for your participation.